USD/JPY Fundamental Weekly Forecast – Rising Yields, Increased Risk Appetite Underpinning Dollar/Yen

The Dollar/Yen rose last week on the back of higher Treasury yields and increased appetite for risky assets. Traders were reacting to optimism over progress in U.S-China trade talks. The catalysts behind the rising Treasury yields were reports that the two economic powerhouses were considering offering concessions to speed up the process of reaching a deal to end the on-going trade dispute. Rising yields helped make the U.S. Dollar a more attractive asset. Increased appetite for risk drove stocks higher, reducing demand for the safe-haven Japanese Yen.

Last week, the USD/JPY settled at 109.774, up 1.212 or +1.12%.

Hopes of an End to Trade Dispute

Fueling the reactions in the markets was a report from CNBC that China had offered a six-year increase in U.S. imports during recent trade talks. Bloomberg News also reported on Friday that the deal would aim to reduce the annual U.S. trade deficit to zero by 2024.

On Thursday, it was reported that Treasury Secretary Steven Mnuchin was considering the idea of easing tariffs on Chinese goods as a means of moving along the negotiations for a new trade deal. The reaction to this news was cautious, however, because the report was refuted by a senior administration official who told CNBC that there is “no discussion of lifting tariffs now.”

Yields and Stocks Rise

Treasury yields and stocks rose last week as investors celebrated potential progress in trade negotiations between China and the U.S. These reactions reduced demand for the Japanese Yen as a safe-haven asset. Furthermore, rising Treasury yields widened the spread between U.S. Government bond yields and Japanese Government bond yields, making the dollar a more attractive investment.

Economic Reports

It was a quiet week as far as economic releases were concerned. In the U.S., the Producer Price Index fell 0.2%, more than expected. This confirmed the Fed’s assessment of muted inflation. It also supported the Fed’s plan to take a pause in raising rates although the market now seems to think that a trade deal will put the central bank back on track to tighten further.

Forecast

This week, the price action in the USD/JPY will continue to be driven by the movement in U.S. Treasury yields and appetite for risk. Investors are likely to continue to focus on events regarding U.S.-China trade negotiations although we may see some increased concerns over the partial U.S. government shutdown.

There are no major reports from the U.S., but traders will get the chance to react to the Bank of Japan’s Outlook Report, Monetary Policy Statement and Press Conference.

The BOJ is expected to leave policy unchanged.